However, with technology’s ascent and that of QQQ, there are growing concerns of the top-heavy nature, notably AAPL’s weight, in some of these traditional beta-index or market cap-weighted funds. Additionally, some analysts opine that the benchmarks’ significant overweight tilts leave them vulnerable should tech stocks fall out of favor.
Alternatively, investors can look at the equal-weight indexing method, which helps emphasize more undervalued stocks since market-cap-weighted methodologies typically overweight larger components that have been outperforming. In contrast, the equal-weighting methodology would rebalance on a regular basis, selling recent winners and buying recent losers to maintain its equal tilt.
For example, the equal-weight equivalents such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGM: QQEW) would only have about a 1.0% tilt toward each of its components. Consequently, QQQE and QQEW may have a larger mid-cap tilt compared to QQQ. The broader diversification may help reduce concentration risk, but potential investors should be aware that due to the equal-weight methodology, these two ETFs would include slightly lower tilts toward the tech segment and lean more toward healthcare and consumer staples.
Full disclosure: Tom Lydon’s clients own shares of AAPL, QQEW.